Slim oil margins dampen traders' party spirit

Reuters Staff

4 Min Read

* Volumes seen increasing faster than profits

* Some traders happy with 10 cents a barrel

By Emma Farge

LONDON, Feb 24 (Reuters) - Record volumes of oil trade and a crude price near $125 a barrel did not mean record profits for those gathered under the glittering chandeliers of the best London hotels for International Petroleum week.

The world’s top oil trader Vitol has reported its highest ever trading volumes and revenues of nearly $300 billion but like all the big hitting trade houses, except Glencore, it keeps its profits private.

Traders and executives flitting between more than 30 industry parties this week said profit margins per barrel of traded oil are near historical lows, driving them to sell more cargoes for less money and fight for their bonuses.

“Ours is a volume business. There’s lots of volume and sadly small margins. I think that’s one of our concerns - it remains incredibly competitive,” Vitol’s chief executive Ian Taylor told Reuters in an interview.

Traders said they often only manage to eke out 10 cents a barrel on an oil deal, compared with several dollars during the golden days of the 1970s.

“When you make 10 cents out of a barrel you are happy. Even in the 1990s you could make between 50 cents and a dollar. It’s changed. There just aren’t the same opportunities,” said a Geneva-based oil trader who flew over for the annual International Petroleum (IP) week gathering.

Another manager at a London-based commodities merchant said he recently congratulated a trader on a 50-cent margin only to discover insurance had not been factored in.

“At these levels, if you are slammed with a demurrage (shipping) problem or something suddenly your margin is wiped out,” said an oil products trader, between sips of Louis Rouderer 2009 vintage champagne at a party this week.

“I want to switch to crude because the ships are bigger and you can handle more volumes.”

NOSTALGIA

Other top traders like Geneva-based Gunvor and Socar Trading have also reported sharp increases in revenues and turnover in 2011.

Glencore is the only major trading merchant that releases profits as it is publicly listed. Energy trading generated 62 percent of its revenues but brought in a margin of just one percent for a second consecutive year in 2011 compared to 3-4 percent in metals.

Ten cents a barrel still amounts to a decent nominal profit of around $200,000 on a Very Large Crude Carrier . But traders say it is peanuts compared to the 1970s when Middle Eastern producers began marketing their own oil, forging the spot market.

This was when the godfather of modern oil trading, Mark Rich, is reported to have made as much as $14 a barrel from lucrative deals selling Iranian oil to U.S. buyers after the fall of the Iranian Shah in 1979, according to his biographer.

Big plays were also possible in the 1990s as Western growth recovered from recession and many like Alex Beard, current director of oil at Glencore, made their names from selling Middle Eastern oil to the West.

Now, with oil demand growth concentrated in Asia and refinery closures such as Petroplus assets in Europe and ConocoPhillip and Sunoco assets on the U.S. East Coast, the client pool has been cut.

Six figure rewards for traders have shrunk for some to a five-figure base salary, dealers said.

The rise of algorithmic traders has also reduced the number of easy deals to be done based on price arbitrages between futures contracts, traders said. And high spot prices relative to other futures means it is tough to make money from simply storing oil, like traders did in the 2009-2010 when the market structure was reversed.

“I don’t really think trading margins have really fallen. I think traders are just complaining because they can’t do what they’ve been doing for over two years, which is buy product and sit on it,” said an oil products trader.